Drive down seemingly any major street in suburbia, and you are bound to see a McDonald’s, Dunkin Donuts, Subway or 7- Eleven. Franchises are everywhere and a business model for an employer seeking to have the independence of a small business owner backed by the brand recognition of a large well known company and its products to sell. However, franchises often present unique questions with respect to the employment relationship and defining who is an employee and who is an employer.
On the federal level, in the game-changing 2015 Browning Ferris decision, the National Labor Relations Board (NLRB) substantially expanded the standard for finding that two employers (i.e., a franchisee and a franchisor) could constitute a joint employer under the National Labor Relations Act (NLRA). The Board found that joint employment could exist even if the franchisor did not directly and immediately control the terms and conditions of employment (i.e., wages, hours and working conditions), but instead only indirectly controlled such employees or reserved the authority to do so. The decision is now on appeal to the DC Circuit Court of Appeals.
The Occupational Safety and Health Agency (OSHA) has reached a similar conclusion, indicating that a franchisee and franchisor may be considered a joint employer if the corporate entity exercises direct or indirect control over working conditions or has the unexercised potential to control working conditions. The Equal Employment Opportunity Commission (EEOC) has also shown support for the new joint employment standard
But will these positions stand the test of time? Much seems to be up in the air with President Trump taking a contrary view and several states fighting back as well. This year alone, seven states (Arizona, Arkansas, Iowa, Kentucky, North Dakota, South Dakota and Wyoming) have enacted laws specifically declaring that a franchisor is generally not considered an employer of either a franchisee or a franchisee’s employees for legal purposes with respect to:
• Fair employment practices/ equal employment opportunity;
• Wage payment;
• Minimum wage;
• Professional employer organizations;
• Unemployment; or
• Workplace safety.
Additionally, nine other states already have laws on the books regarding this joint employment issue:
• Utah; and
Similar legislation has been introduced in Nebraska, New Hampshire, South Carolina and Washington.
Under such laws, a franchisor will generally not be considered an employer of a franchisee or the employer of a franchisees employee unless:
1. The franchisor has agreed in writing to assume the role of an employer or co-employer of the franchisee or the franchisee’s employees; or
2. The franchisor has exercised a type or degree of control over the franchisee or the franchisee’s employees that is not customarily exercised by a franchisor for the purpose of protecting the franchisor’s trademarks and brand.
Many of these laws provide that the franchisee is the sole employer of workers for whom it provides a benefits plan or pays wages, except as otherwise specifically provided in the franchise agreement.
Jonathan Segal, a partner at Duane Morris LLP in Philadelphia, says, “These laws are an attempt to counteract overreach by certain federal agencies that try to find deep pockets for potential wrongs done by franchisees. But having a deep pocket does not make a franchisor an employer, and there is hope that the federal government will follow the states on this issue.”
At the moment, even with the onslaught of legislation curbing lawsuits under state laws, franchisors still risk exposure under federal laws that remain unsettled.
In light of these developments, it is critical that a franchisor try to minimize the risk of joint employment liability. Here are eight steps a franchisor can take to safeguard itself:
1. Closely evaluate business relationships, franchise agreements and relevant related documents to assess whether it has the right to control, either directly or indirectly, the terms and conditions of the franchisee or the franchisees’ employees.
2. Make sure there is significant separation between the franchisee and franchisor and avoid tight control by providing only what is needed with respect to the trade name, professional methods, customer goodwill or commercial image. The more discretion a franchisee has, the less likely the entities will be considered joint employers.
3. Avoid using a sample employee handbook, even if franchisees may modify it, as this may suggest a greater degree of control.
4. Avoid being listed as the employer on employee W-2 documents.
5. Encourage franchisees to comply with labor and employment laws, but to retain the services of HR consultants and third party vendors that can handle HR administrative needs, benefits, payroll, etc. And while it’s ok to recommend vendors, a franchisor should not insist franchisees use a particular one.
6. Avoid becoming entangled in the day-to-day management of the franchisee’s employees (i.e., wages, hours and working conditions) and employment decisions that the franchisees must make. Always let the franchisee set the schedule.
7. Allow franchisees to handle their own hiring and posting of job ads, particularly with regard to lower-level employees.
8. Avoid becoming involved with employee training to the greatest extent possible, especially with regard to lower-level employees who should receive onsite training with higher-level managers.